(Reuters) - Rio Tinto Ltd (RIO.AX) has scrapped the proposed sale of its $1.3 billion diamonds business, a setback for its plan to sell a swag of mines and company stakes to tighten operations during a global industry downturn.

The world no.3 miner has at least half a dozen assets on the block, aiming to pare $19 billion in net debt, cut costs and boost returns to shareholders, but buyers are unwilling to pay up in face of volatile commodity prices and rising debt costs.

"In resource land it's just a little bit tough at the moment," said Paul Xiradis, chief executive of Ausbil Dexia, which owns Rio Tinto shares.

"The market would have preferred for Rio to sell (diamonds)....But if you're not going to achieve the right price, there's no point in cutting off your nose to spite your face just to achieve an end."

Rio is not alone in struggling to sell assets. Barrick Gold (ABX.TO) was unable to pin down a sale of a stake in African Barrick Gold (ABGL.L) to state-owned China National Gold in January, and Peabody Energy (BTU.N) and Brazil's Vale (VALE5.SA) have given up trying to sell some mines in Australia.

Rio Tinto's new chief executive, Sam Walsh, this month hosed down expectations for a sale of the diamonds unit, amid speculation the company was going to float the business after failing to find a buyer.

"This is not market day at the bazaar. I'd be quite happy to keep it," Walsh was quoted saying in an interview with The Telegraph in London.

Rio's Diamonds and Minerals chief executive Alan Davies said there was a positive market outlook for diamonds.

"After considering a number of alternative strategic ownership options it is clear the best path to generate maximum value for our shareholders is to retain these businesses," he said in a statement on Monday.

Rio's shares fell 2.2 percent to A$51.50, close to a nine-month low, as mining stocks were pelted on worries about slowing growth in China.

LAGS ARCH-RIVAL

Rio Tinto put the diamonds arm up for sale in March 2012, soon after rival BHP Billiton (BHP.AX)(BLT.L) put its diamonds unit on the block. BHP won the race to find a buyer last November, selling to Harry Winston, now called Dominion Diamond Corp (DDC.TO).

The Canadian company is co-owner of the Diavik mine with Rio Tinto and had expressed interest in buying Rio's 60 percent stake in the mine, but was not interested in the rest of its diamond business.

The diamond unit, with operations in Australia, Canada and Zimbabwe, reported a $43 million loss in 2012, down from a profit of $10 million a year earlier.

While BHP has racked up more than $4.6 billion in asset sales over the past year, over the same period Rio has only managed to sell its Eagle nickel mine for $325 million.

"Debt costs have blown out by 200 basis points in the last couple of weeks. That makes it pretty tough if you're trying to finance an acquisition," said a resources banker, who is not involved in Rio Tinto's sales.

The assets BHP has sold have mostly gone to Japanese and Chinese bidders, who are cashed up. Asian buyers are seen as most likely to be able to complete deals, which could help Rio Tinto at least on the sale of its Australian coal assets.

It has attracted interest from Indian conglomerate Aditya Birla, Coal India (COAL.NS), China's state-owned Shenhua Group Corp and Japanese trading house Marubeni Corp (8002.T) for its Clermont coal mine and a 29 percent stake in Coal & Allied.

Rio is also looking to sell its Pacific Aluminium arm, on the block since 2011, a majority stake in Iron Ore Company of Canada (IOC) and its Northparkes copper mine in Australia.

The stake in IOC attracted a wide range of interest, allowing Rio to come up with a shortlist of half a dozen suitors, but there are only three bidders left in the running, according to people familiar with the situation.

Rio is seeking between $3.5 billion and $4 billion for that stake, according to one source.

The sale of its Northparkes mine, which could fetch $800 million, is seen as the easiest to seal. However people familiar with the situation have said there is only one bidder left, OZ Minerals Ltd (OZL.AX), and it is under pressure not to overpay.